Editorial: Why Belt and Road Plan Is a Game Changer That Could Further Open China’s Markets

Beijing’s $1 trillion push to reshape the international trade landscape passed another milestone last week, with the successful conclusion of the Belt and Road Forum, where more than 270 cooperation deals were signed. It was the highest-level multilateral event held in China, with heads of state or government from 29 partner countries in attendance.

The agreements inked at the summit covered a wide range of sectors including telecommunications, infrastructure development, trade promotion and financial cooperation. It also pushed for greater openness in terms of market access and information flow between member countries – a key tenant of the Belt and Road Initiative.

President Xi Jinping’s ambitious plan, the Silk Road Economic Belt and 21st Century Maritime Silk Road, aims to develop a national strategy to improve infrastructure and trade connections between China and markets in Europe, energy-rich Central Asia, and resource-rich Southeast Asia and Africa. Since it was announced in 2013, central government departments and local authorities have issued various policies to further open the Chinese market and promote international cooperation.

The trade push, inspired by the ancient Silk Road, comes at a time when globalization is challenged by rising protectionist sentiments and populism amid sluggish global growth. China is also facing mounting pressure as growth at home slows. Ongoing attempts to reduce the country’s reliance on heavy industries and boost the services sector add further challenges. If the new Silk Road plan can ramp up China’s growth and strengthen its push for reform, it will become a successful strategy similar to the country’s accession to the World Trade Organization, which prompted a slew of domestic changes and further market liberalization. As President Xi said at the Beijing summit, “a country’s opening is like the ‘struggle of a chrysalis when it’s breaking free from its cocoon’, which is painful in the short-run, but creates a new life.”

Chinese policymakers have said repeatedly that opening up markets was a top national strategy. However, as China’s economy expands and foreign exchange reserves grow, some have argued that the focus should shift to pushing Chinese companies to go out rather than inviting foreign investors to come in. But this argument is misguided.

China needs foreign investment in several sectors of the economy to ensure future growth. Research shows that the level of openness in China’s economy was lower compared to the global average, as there are still several barriers of entry that keep foreign investment from flowing into certain sectors, including mining, power generation and automobile manufacturing. Many of these industries suffer from low efficiency and productivity due to lack of competition.

As technological breakthroughs bring about dramatic changes and even create new business segments, China must be proactive and learn from others to catch up with developed countries.

Much of China’s exports have come from super-city clusters such as the Yangtze River Delta Economic Zone and the Pearl River Delta region. Now the government is planning a similar cluster in Northern China, the Beijing-Tianjin-Hebei region that is nearly six times the size of the New York Metropolitan area and will house 8% of the country’s population. The Belt and Road program can strengthen these regional development plans and push for further opening of these major economic nerve centers.

Meanwhile, efforts to support the overseas expansion of Chinese companies should go hand-in-hand with measures to attract foreign direct investment to lift growth and help old industries adopt new technologies.

There has been a growing cacophony of complaints in recent years about multinationals losing ground in China. Surveys done by the American Chamber of Commerce and the European Union Chamber of Commerce in Beijing have found that an increasing number of their members were complaining about the worsening business environment in China, policy hurdles and limits in terms of market access. Although authorities have reiterated their support for foreign investors, many still feel anxious. If China can’t offer overseas investors wider access to its market and more transparent supervision, Chinese companies may be hit by similar obstacles overseas.

Genuine efforts to open up Chinese markets will also rebut skeptics who have viewed the Belt and Road Initiative as a way for Beijing to spread its geopolitical influence and to find ways to sell its steel and cement stockpiles or export its industrial overcapacity problem.

There is a lot to be done to achieve this goal, but several sectors are ripe for opening up in the near future.

The financial market was one such area highlighted during the recent forum. Currently, the insurance industry is the most open area in finance, with no limits on overseas investments. Foreign investors are also allowed to hold a 49% stake in fund management firms and securities firms, but no more than a 20% share in Chinese banks. As the country’s financial industry grows, there is an urgent need to improve the capacity for risk control and corporate governance, which require more outside support.

Entry barriers blocking foreign capital from entering certain subsectors have slowed the development of the financial industry and partly contributed to mounting credit risks seen in recent years. Earlier this year, the State Council, China’s cabinet, issued a policy document that promised to ease restrictions that prevented foreign capital from flowing into financial markets and institutions. Proper implementation of these pledges would go a long way to ensure that the financial sector is open and transparent.

Another major industry that needs a shot in the arm is automobile manufacturing. According to a 1994 policy, foreign investors can hold no more than a 50% stake in a joint venture making cars and can invest in no more than two joint ventures producing the same kind of vehicles in China. These rules were designed to introduce new technology while protecting China’s fledging automobile industry. But these policies are now outdated. The car industry in China and abroad has undergone profound changes over the past 23 years. In late April, an automobile industry development plan jointly issued by the Ministry of Industry and Information Technology, the National Development and Reform Commission and the Ministry of Science and Technology pledged to gradually remove these limits on foreign ownership of car manufacturing facilities.

Openness is essential for sustainable development. The international community is watching China’s next move after the conclusion of the Belt and Road Forum. The country should use this opportunity to further promote peace, openness and cooperation to fuel global prosperity and strengthen domestic reform. The Belt and Road Initiative is China’s brainchild, but it should serve the world. And it can only achieve this goal if the vast Chinese market is opened further, making China a responsible player on the global stage.